The long list of banks which are currently being investigated by the U.S. Justice Department for their role in fixing the benchmark LIBOR rate may be forced to give up the legal advantage accorded to them under the statute of limitations.  The banks, including Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM), RBS (NYSE:RBS), Deutsche Bank (NYSE:DB) and UBS (NYSE:UBS), no doubt hoped to benefit from the fact that more than five years have passed since when the alleged LIBOR manipulation occurred. But now the banks find themselves in a catch-22 situation, wherein they either sign “tolling” agreements with the Justice Department and forego their right to fall back on the statute of limitations, or they don’t sign the agreement and risk facing over-sized lawsuits filed without a thorough investigation.
The U.S. Justice Department and the Commodity Futures Trading Commission (CFTC) have been hot on the heels of some of the world’s largest banks as they investigate their role in manipulating the London Interbank Offered Rate (LIBOR) before and during the economic crisis of 2008. Earlier this year, Barclays (NYSE:BCS) earned the dubious distinction of being the first bank to be found guilty of under-reporting its borrowing rates to boost profits on short-term trades. The largest British bank settled with regulators for $451 million.
The regulators now have their sights set on other banks which form the 16-member group that contributes daily towards the LIBOR. The investigation against RBS is reportedly close to completion, and the 82% government owned British bank is already in settlement talks with the regulators.
However, the CFTC expects that the ongoing investigations against the other banks will take months to conclude.
The Tolling Agreement: What And Why
In a bid to buy itself more time to complete investigating all banks allegedly involved in the LIBOR scandal, the regulators asked the banks to sign tolling agreements earlier this year. In view of the fact that the investigation relates to incidents that took place during 2005-2008, this agreement seeks to ensure that the banks do not try to avoid penalties by legally claiming that too much time has passed since. The federal law sets a five-year time limit under the statute of limitations, i.e. individuals and firms cannot usually be charged for frauds that took place more than 5 years ago.
Can’t The Banks Just Decide Not To Sign It?
Yes, they can – but that leaves them vulnerable on another front. If the tolling agreement is not signed, regulators will be forced to file lawsuits against the banks without completing their investigations. And in the process, they will most likely over-state the scope and size of a particular bank’s involvement in manipulating the LIBOR. More importantly, while the statute of limitation acts in the interest of the banks, it is not an absolute legal requirement and a court may potentially seek to overlook the timelines considering the fact that the widely-used LIBOR indirectly impacts mortgage and other lending rates too.
Understanding The Impact on Banks
Banks found guilty in the LIBOR scandal are expected to see multi-million dollar settlements similar to the one entered by Barclays earlier. This would clearly result in a significant one-time charge on the bank’s income statement for the period in which the settlement occurs.
But to make matters worse, banks also stand to lose millions more as they could potentially be sued by investors who were affected directly because of manipulated rates.
The impact of settlement charges for Citigroup on its total value can be understood by making changes to the chart below.Notes: